The rise and fall of NFTs - From $25B to worthless

The Genesis of NFTs: From Niche to Mania [00:00]

• In 2021, the NFT market saw over $25 billion in trades, a stark contrast to its nascent stage in 2017 when the underlying technology was barely established.
• By 2025, projections indicated that over 95% of these NFTs would become worthless, with most selling for less than their original purchase price.
• An NFT is defined as a non-fungible token, conceptually likened to a unique digital baseball card.
• The story begins in 2017 with CryptoKitties, a digital game allowing users to breed and trade digital animals, with one CryptoKitty selling for $117,000, even overwhelming the Ethereum network.

This was a hint of the mania to come.

The Foundations of an NFT Marketplace [01:12]

• In early 2018, entrepreneurs Devin Fenzer and Alec Catalá founded OpenSea, a marketplace for crypto collectibles, which are NFTs.
• Despite the pivot, OpenSea had only a few hundred users by early 2020, and the term "non-fungible token" was largely unknown.
• Behind the scenes, developers were refining the technology and tools necessary for NFT trading, while early crypto adopters engaged with projects like CryptoPunks and Decentraland.

It was the calm before the storm.

The Pandemic Spark: Fueling the NFT Explosion [02:04]

• The early 2020s saw the COVID-19 pandemic leading to people being homebound, increasing internet usage by over 60%, and significant government stimulus totaling over $10 billion.
• This influx of capital and free time created a desire for speculation, propelling NFTs out of their niche status.
• NBA Top Shot, a product allowing fans to buy and sell digital highlights, emerged as an early mainstream success, generating over $200 million in sales in February-March 2021, with a LeBron James dunk clip selling for $200,000.

Fans rushed in. It was something licensed by the NBA.

Mainstream Adoption and Celebrity Endorsements [03:10]

• In March 2021, artist Mike Winkelmann, known as Beeple, achieved a record-breaking $69 million sale for his NFT artwork at Christie's, turning him into an overnight sensation.
• The media attention surrounding these high-profile sales attracted widespread public interest and a desire to participate in the burgeoning market.
• Celebrities like Paris Hilton and Jimmy Fallon discussed their NFT investments, and figures like Snoop Dogg and Steph Curry launched their own NFTs, creating a sense of FOMO (Fear Of Missing Out).
• The Bored Ape Yacht Club, a collection of 10,000 algorithmically generated ape images, became a cultural phenomenon, with some rare NFTs selling for hundreds of thousands of dollars, exceeding the price of houses.

It felt like you were missing out if you weren't playing the NFT game.

OpenSea's Dominance and Venture Capital Influx [04:44]

• OpenSea, initially a slow-growing startup, became the dominant NFT marketplace, handling over 90% of all NFT trades by 2021.
• Following Beeple's sale, OpenSea's trading volume increased by 14 times between February and March 2021.
• The company raised significant funding, including $100 million in mid-2021, valuing it at $1.5 billion, and another $300 million in January 2022, valuing it at $13.3 billion, making its young founders instant billionaires on paper.
• This boom attracted substantial venture capital, leading to the emergence of dozens of other NFT marketplaces and startups, with celebrities like Mark Cuban and Ashton Kutcher investing in the space.

Dozens of NFT marketplaces, tools, and startups well, they sprung up as more and more venture capital flooded into the space.

The Mania Pattern and Its Inevitable Crash [06:04]

• The prevailing narrative painted NFTs as revolutionary, impacting everything from collecting to property titles, reminiscent of historical gold rushes and speculative bubbles like Beanie Babies, meme stocks, and the dot-com boom.
• Manias typically follow a pattern: early adopters profit, mainstream adoption follows, and eventually, the market runs out of buyers, leading to a crash where most participants lose money.
• Many individuals, like the narrator, participated in the NFT market with the hope of quick riches but ended up losing money, akin to those who mined for gold in the 1800s and returned poorer.
• By the market's peak in March 2022, even a simple NFT of a rock sold for $1.3 million, illustrating the extreme irrationality of the market.

Man, history doesn't repeat, but it sure does rhyme.

The Unraveling: Scams and Market Contraction [07:14]

• A sobering statistic from Spring 2021 revealed that only 30,000 to 40,000 people were trading NFTs daily, indicating a highly concentrated market despite its global phenomenon status.
• Scammers exploited the system by engaging in wash trading, where they would artificially inflate NFT prices by trading amongst themselves before selling to unsuspecting buyers.
• A study in January 2022, when NFT trades reached $17 billion, indicated that over 60% of these trades were part of scamming operations.
• The sale of Jack Dorsey's first tweet as an NFT for $2.9 million, touted as "the Mona Lisa of the digital world," later saw its value plummet by 99.8% when it was resold for $6,800 in April 2022.

This is not some joke.

Crypto Winter and the Erosion of Trust [10:11]

• The NFT market entered a "crypto winter" in early 2022, coinciding with a significant downturn in cryptocurrency prices, which fell over 70% from their peaks.
• As most NFTs are purchased with crypto, the decline in cryptocurrency values directly impacted the funds available for NFT purchases, leading to a sharp drop in NFT sales.
• NFT trading volume on platforms like OpenSea plummeted by over 97% from $17 billion in January 2022 to $466 million in September 2022.
• OpenSea had to implement cost-cutting measures, including laying off over 20% of its staff, and investor valuations for the company dropped by over 90%.

NFTts aren't bought in a vacuum. They're mostly purchased with crypto.

Scandals and Scams Devastate the Market [11:13]

• Trust in the NFT market eroded due to various scandals, including an OpenSea executive being caught "front-running" NFT listings for personal gain, essentially insider trading.
• Phishing scams led to the theft of NFT wallets, and "rug pulls" became common, where project promoters would disappear after investors had bought in.
• The collapse of projects like Terra/Luna further wiped out billions of dollars, contributing to a general loss of confidence.
• By 2025, the NFT art market had collapsed by 93% from its 2021 peak, with the vast majority of NFTs becoming unsellable for even a few dollars, unlike income-generating real estate.

The scammers were having a field day.

The Aftermath: Worthless Collections and Enduring Lessons [12:50]

• Despite a continued interest from brands and artists connecting with fans, the speculative frenzy of NFTs has largely ended.
• A 2023 analysis revealed that over 95% of NFT collections were completely worthless, with no buyers, transactions, or dollars exchanged, leaving over 23 million people with NFTs valued at zero.
• While NFTs might see a resurgence in the future, similar to Bitcoin's cycles, the current state is one of significant depreciation.
• The underlying cause of these manias is human nature: the tendency to see others getting rich and replicating their behavior, leading to a logical fallacy of continued investment.
• The key lesson for individuals is to recognize manias and avoid significant losses, while for businesses, the profitable approach, exemplified by Levi's during the gold rush, is to provide essential goods or services to those participating in the speculative frenzy.

If you can figure out how to make tangible lasting value and maybe have a mania fund that for you, that's a great thing.